Tea with Solace: Mapletree Greater China Commercial Trust.

This is a guest blog from a regular guest blogger, Solace, on a REIT in his portfolio. I always appreciate Solace's guest blogs which show how much thought he puts into every single one of his investments in the stock market. I hope you find Solace's guest blogs beneficial like I have.

So, here is Solace's Review of 
Mapletree Greater China Commercial Trust (MGCCT):

MGCCT got listed on March 2013. It was oversubscribed and the general feeling of the stock market at the time was bullish. I subscribed to this IPO and was one of the lucky people who received allocation of shares. I did a quick flip on the first day of IPO and realized a gain of about 11%.

The reason for selling during the first day of trading and my subsequent relook at the stock more than a year later will be discussed further.

Asset Portfolio

MGCCT consists of just two mixed use assets - Festival Walk and Gateway Plaza.

Festival Walk

A landmark territorial retail mall and lifestyle destination with an office component, comprising a seven-storey retail mall with a four-storey office tower and three underground car park levels, located in the upscale residential area of Kowloon Tong, Hong Kong.

Gateway Plaza

A premier Grade A office building with a retail atrium, consisting of two 25-storey towers connected by a three-storey retail atrium and three underground floors, located in the established and mature prime Lufthansa Area in Beijing, China.

The two properties cover a gross floor area of approximately 2.4 million square feet and the total net lettable area is about 1.9 Mil square feet.

With only 2 properties, it is easier to do an analysis but it also presented a problem of its own, Concentration Risk.

One has to take note that Festival Walk alone contributes to 75 per cent of the asset value and gross revenue of the Reit. The performance of the REIT is tied to the fortunes of the Festival Walk. As an investor we should do our homework to ensure that we can predict the earning power of the mall or we might be in for a big surprise if the earnings tumble down the road along and, with it, the share price.

Portfolio Performance thus far

Gross revenue and Net Property income has shown to be beat initial forecasts in prospectus and reported to outperform Y-O-Y comparing FY Quarters to Quarters.

Festival Walk remained fully occupied at 100% for both retail and office sectors. Shopper traffic and tenant sales in 1Q FY14/15 increased slightly at 0.5% and 0.1% respectively year on year. Of the retail leases expiring in FY14/15 at Festival Walk, 90% have been renewed or re-let with rental uplift of 21%. Weighted Average Lease Expiry (WALE) by Gross Rental Income of Festival Walk is 2.9 years. Do take note that for FY16/17, 22% of Gross rental income is due to be renew.

The committed occupancy at Gateway Plaza was 98.6% as of 30 June 2014. These committed leases represented tenants from the automobile and machinery sectors. As of 30 June 2014, 80% of the leases expiring in FY14/15 have been committed, with a significant rental uplift of 33% against preceding rental rates. WALE for Gateway Plaza it is 2.5 years.

Key Financial Indicators and Capital Management.

Gearing Ratios: 38.6%

Interest Coverage Ratio: 4.8 x

Total Debt Outstanding: HK$11,455 m

Weighted Debt Maturity: 2.7 years

Annualised DPU (cents): 6.257 cents

Distribution Policy: Semi- Annual Basis

Gearing Ratio is definitely on the high side. A silver lining would be in order to mitigate the risk of rising interest rates; more than 70% of MGCCT’s debt has been fixed for FY14/15 and FY15/16.

To ensure stability of distributions, MGCCT has hedged 90% of HK$ Distributable Income forecasted for FY14/15 and is actively monitoring the market to progressively convert RMB Distributable Income to SGD when the rates are favourable.

Management Fees Structure.

How Reits pay their manager through fees has been questioned from time to time. MGCCT is one of the first Reits to adopt DPU-based fee model rather than the traditional asset based fee structure that most S-Reits use. This is touted to be superior as most of the return from a Reits is delivered via DPU yield.

However, some would argue tying fees based on DPU may or may not necessarily better align the interests of the management and unit holders. A group will believe that fees tied to assets are more stable and makes it easier to pursue asset enhancement activities. There is also a possibility of managers using the DPU based model to focus on short term gain through increase use of gearing to boost DPU, but set itself up for disaster over the long term.

There is no evident of MGCCT behaving this way currently. I do not have opinion on this matter as I believe no fee structure is fool proof. Concentrating on the track records of the manager seems to be a wiser choice.

Solace's Recent Actions.

At Listing Date of 7 March 2013, issue price was $0.93 (NAV/unit $0.91). It had a projected dividend yield of 5.6% for FY 13/14 and 6.1% for FY 14/15. I sold the shares when the price reached $1.04. Translates to about 11.8% gain.

At the price, I felt that it makes sense to cash in. It was above NAV, the projected yield of 5.6% didn’t justify the concentration risk and high gearing in my opinion. I needed to have bigger safety margins and want to see that the management can achieve its DPU while paying close attention to the performance of Festival Walk.

When prices break below 90 cents towards the end of last year, I decide to the put the Reits back in my watch list. Also during the waiting period, it has shown that the Mapletree pedigree had delivered again with reports of DPU and NPI beating forecasts in prospectus.

It was a game of waiting patiently to see if the price would drop to a level where the dividend yield was more acceptable to me with the concentration risk in mind.

I pick up some shares in at prices from 83 cents to 85 cents a unit. Average entry is about 84 cents. This gives me a dividend yield of about 7.5% which is more acceptable to me. It was revealed that some of the senior managements also bought shares in recent months at $0.805 and $0.80. It is always a plus point if one can load up at about the same price as the board of directors.

If the share price declines to a level close to dividend yield 8% again, I might be interested to increase exposure again.

Read some of Solace's other guest blogs:
1. Frasers Centrepoint Limited (FCL).
2. King Wan Corp. Ltd.
3. Common Sense Investing.

Tea with TheMinimalist: Financial planning? Start with why!

This is a guest blog by a mysterious and wise man with the codename: TheMinimalist.

Many of us reading financial blogs such as ASSI understand the importance of planning our finances. The maxims of “Spend less than you earn”, “Invest in ETFs/Index Funds” and “Protect ourselves with insurance” immediately come to mind.

We KNOW it is critical to do all the above yet we DO NOTHING about it. Why?

It wasn’t until I met a university friend that I finally got my answer.

Recently, I was looking through my FB news feed and saw that one of my university friends changed his job recently. I didn’t really talk much to him back in school but was curious about how he is doing. It has been about 3 – 4 years since I last saw him. I decided to arrange a nice dinner with him after work.

While I was waiting for him at Raffles City Starbucks, I saw a guy that somewhat resembled him but he looked “bigger” so I looked away. Then, that guy started messaging on his iPhone. “Ok, I think that’s him” and I was spot on when I received the whatsapp on my phone. “Oh wow, you look more prosperous since I last saw you huh…” I commented. “Yeah, I have gained 6-7 kg since I started work, haven’t exercised much you see…” he explained.

My Body Mass Index (BMI) is 21.7 and falls within the normal range. However, the fear of becoming a “fattie” motivated me to take steps to lead a healthier lifestyle by:

• Exercising more frequently after work
• Opting to eat fruits and nuts for my dinner
• Controlling the amount of food intake for each meal

The ongoing efforts of such a healthy lifestyle have paid dividends and I am currently feeling “lighter” and better.

So what is the lesson here?  

 

“Humans are VISUAL creatures, we ACT by EMOTIONS, not so much with reason.”

We can read millions of books on investing, read every single blog post by AK71 and, yet, NOT be motivated to do anything about our money. However, when we SEE our peers doing much better than us during the class reunion, do we not feel something stirring in our hearts? Yes, that feeling that we are not good enough and that there’s so much more we can do in our lives. 

Now, if you are currently struggling with motivations in personal finances, I think I might just have the solution for you.

Here are two simple things you can do immediately to start turning your financial life around:

1.     Find someone who is more successful than you financially (Psst…AK71). Ask him out. Buy him a nice dinner at Tim Ho Wan. Learn as much as you can from him about budgeting, investing and insurance. Most successful people will happily oblige. After all, people LOVE to talk about themselves. Fact of life. 

2.     Find someone who is doing not so well in his or her finances and ask them out for coffee. They can be knee-deep in debt, spending more than they earn, invested in “scams” etc. Your intention is neither to mock them nor to sympathise with them.  Instead, be curious and figure out what got them into such trouble in the first place. Most of the time, it’s due to bad decisions and not by circumstances.

Ask yourself and decide (out of the two) who you want to be like in 3 years' time.  

Next, take out a piece of A5 paper and write down ONE specific thing you will DO from today onwards to better manage your finances. Then DO it.

If you need some inspiration on actionable items, here are some resources you can turn to:

Achieving level one financial security for Singaporeans.

Save 100% of your take home pay! What?

If we are not rich, don't act rich! 

Every single time you find yourself faltering, think back to the two people you have just met. Who do you want to be like in three years’ time? The answer (to your future) is in your hands.

Go try it and share your experience in the comment box below or FB. I look forward to your response to my debut guest blog! J 

AK's note:
I think I have been blogging too hard lately. I might take a long trip overseas to take a break. I should be un-contactable by all modern communication devices then. So, unless courier pigeons are available, invitations to have dinner at the atas tim sum restaurant might not reach this fatty.  -.-"

FREE Investment Linked Policies or Term Life Policies?

I took down this blog post after it was put up for only slightly more than an hour at 8am this morning. 

In that short period of time, it received about 400 page views and several comments from readers, a couple of which were more than unpleasant. 

After deleting the blog post, I received a few comments and PMs from readers in FB who missed reading it.

Often, we are presented with charts and tables by advisers which do not show the complete picture. I am not claiming that I am presenting the complete picture here. 

I most certainly am not but I believe I have illustrated quite simply in the blog post why ILPs are not cost efficient for consumers. 

They are overpriced life insurance products and as investment tools to help grow our wealth, they are mediocre at best.

I am quite mindful of my blog's louder voice and the potential backlash I might be subjected to. 

Despite what some people might think, I am not crazy. I wouldn't want to get into trouble. 

However, sometimes, we just have to say it as it is and this is what AK is known for doing. Right?





Feel free to disagree but please be civil about it.

However, if you think that what I have done is worthwhile and if you agree that more people should know about this, please share this with your family and friends. 

So, come what may, resurrected, here it is:

----------------------------------

A reader told me that his classmate from school who is trying to get him to buy an ILP told him that, basically, after 20 years, he will break even on that ILP. It means that he would have received 20 years of life insurance for FREE! 

Sounds really attractive when the word FREE is thrown in, doesn't it?

$1,000,000 life insurance coverage with a premium of $13,000 a year. That is quite a bit of money.





Anyway, because I have been blogging so much about buying term life insurance lately, the reader was quite torn as to what should he do.

So, my simple brain churned out some simple numbers.

If he were to buy a $1,000,000 term life insurance instead, he would pay less than $2,000 a year, being in his early 30s, for the next 20 years. 

That means a savings of more than $11,000 a year.





For ease of calculation (i.e. my ease of calculation), let us assume that the term life insurance premium is $3,000 a year and that the savings is only $10,000 a year. 

Yah, only $10,000.

It is time for some magic!

Now, assuming that the reader were to invest the yearly savings of $10,000 into stocks of fundamentally sound businesses that have a dividend yield of 5%, he would, in 20 years, receive in dividends, from year 1 to year 20, the following:

$500
$1000
$1500
$2000
$2500

$3000
$3500
$4000
$4500
$5000

$5500
$6000
$6500
$7000
$7500

$8000
$8500
$9000
$9500
$10000

Total pocket money (nothing reinvested) collected in 20 years: $105,000.







Pause.

Sinking in.

Pause.

Sinking in.

Pause.

Sinking in.

Stunned? Banana...

$105,000 is more than enough to pay for 20 years of premiums for a $1,000,000 term life insurance! 

In fact, it is about twice as much as the hypothetical premiums and probably thrice as much as the real premiums! 

So, isn't this a FREE life insurance as well? 





In fact, it is better than FREE since there is a lot of money leftover!

Chances are that the $200,000 worth of investment would still be intact 20 years later and it would continue to generate income year after year. 

That is $10,000 a year, year after year.





I know this is a simplistic example but it makes the whole matter of why an ILP is not a good choice so much easier to see. 

I believe that the assumption of a static 5% yield on investment is not over the top either. In fact, it could be quite unrealistic, in a good way.

Anyway, I believe I created another problem for the reader after our chat. 





He said:

"thanks, and i having some headaches how to reject my friend now..."

Oh, dear. Sorry. -.-"

Related posts:
1. Term life insurance: Some lessons.
2. Term life insurance: Why buy term?
3. Whole life insurance and investing.
4. Investing for income: An important element.
5. The best insurance to have in life.

SATS: A nibble while learning from Rusmin Ang.

I have shared here in my blog on a few occasions that I am increasing my investments in companies which are going to be less affected negatively in an environment of rising interest rates.

Although interest rates are still low, it stands to reason that they will have to rise in future. When interest rates do rise, businesses and individuals who are heavily leveraged will be the ones to feel its direct impact more severely.




In view of this, one business which I have accumulated a small long position in recently is SATS as its stock price became significantly lower at $2.94 a share upon the counter going XD.

A price of $3.00, give or take a few bids, gives us a PE ratio of almost 19x. Of course, if the company is a grower, then, it might not be considered expensive. Otherwise, I would feel more comfortable buying more if the PE ratio is lower.

Although sometimes SATS pay more dividend per share (DPS) than its earnings per share (EPS), a more normalised payout ratio is 70% of earnings. So, I believe that an annual DPS of 11c is realistic. Based on $3.00 a share, that is a dividend yield of 3.67%. Not anything to scream about.

Technically, there seems to be some support at $2.95. This is probably due to the fact that SATS have been buying their own shares in the open market each time price goes to $3.00 a share or so. Technically, it is also easy to see that if support at $2.95 were to be lost, we could see $2.50 tested.

My friend, Rusmin Ang, at The Fifth Person is hardworking. You might want to read what he has to say after attending SATS' AGM:
12 quick things I learned from SATS' AGM 2014.

Related posts:
1. Portfolio review: Unexpectedly eventful.
2. NeraTel: What is a sustainable dividend payout?

Tea with Ms. Y: 3 points to share with fresh graduates.

A regular reader graciously agreed to contribute a guest blog and here it is:

I'm very honoured to have AK71 request for a guest blog post from me. I would like to share some of my experiences and hope that people would benefit from these.

1. Get a job before graduation.

In my last semester in university, I was busy writing resumes and sending them out. My goal was to get a job ASAP. To me, the ability to secure a job at graduation or before demonstrates how good a student is. It is not just the grades we get.

Moreover, a few months of unemployment would set me back financially. We all have some living expenses to take care of, right?

2. Save money: Keep it away until you forget you have it.

I'm not inclined to save money. I find going the extra mile to hunt for cheap deals or reduce spending is quite troublesome and tiring. I like to spend money. I like to go for holidays, shopping trips etc. 

However, I do know the importance of having savings. One thing I learnt from my mother is to keep some money away until I forget I have it. So, I have some endowment plans and monthly savings accounts.

These tools are very useful especially in terms of timing my savings to prepare for my resale flat purchase. Of course, this method might not be good for everyone but it forces me to save.

3. Invest in yourself.

Take courses to improve yourself. The journey just started.

I believe that if I am not giving real value in my job, my employer has no incentive to give me an increment that is beyond inflationary rate. My real wage will be stagnant.

Plan your career path. Invest in yourself to cross disciplines. Employers pay good money for people who can bridge gaps.

I realized that when I took courses, I had less time to spend money. That resulted in more savings for me.
                     
Focus on doing what will secure higher pay for us. Seriously, because it's just going to get more difficult when the bigger demands of life kick in later on. For examples, getting married, setting up a family, buying an apartment and taking care of parents who are aging with medical needs.

Related posts:
1. Do you want to be richer?

2. The very first step to becoming richer.
3. How much life insurance should a fresh grad have?
4. Be a plumber or be unemployed?
5. A fast track to wealth building!

Ascendas Hospitality Trust: A nibble.

This business trust owns hotels in Australia, China, Japan and Singapore. 

Unlike rental income from industrial, commercial or residential properties, for examples, a hotel's income is less stable. 

It has a strong element of seasonality.

As most of Ascendas Hospitality Trust's properties are in Australia, China and Japan, its income is also very much subjected to foreign exchange risks.





Hotel Sunroute Ariake in Tokyo is located in the heart of the Ariake area near the Tokyo Big Sight Convention Center.


To make it more attractive as an investment for income, at its IPO price of 88c a unit, yield was engineered to be higher through a 1 year waiver to income distributions by the sponsor. 

The income forecast was also very optimistic.





To be fair, it was probably a difficult job to provide an accurate forecast and, in July 2012, I said:

"I feel that I need to be conversant in the economies of three countries and the health of their respective tourism sectors to analyse how well they could continue doing. 

"I would also need to take into consideration that income would be collected in three foreign currencies and converted to S$ for distribution to unitholders.

"Foreign exchange rates would affect income in S$ terms.

"So, analysing this Trust and forecasting its future income is somewhat more challenging. It is less straightforward." (See related post #1)





I do understand that having properties in different countries reduces the risk of concentration. 

However, whether it is worth having to deal with so much foreign exchange risk or not, I am not sure.

The Trust's unit price suffered a big decline when it did an equity fund raising through a placement to raise $50 million to partially fund the purchase of Osaka Namba Washington Hotel Plaza in Japan not too long ago. 





The price? 

68c a unit. 

The number of units in issue increased by 7.1%.

Gearing is estimated to be about 38% while NAV per share is about 74c. 





Its relatively high gearing level could be a source of concern although the Trust does not have any debt due till 2016. 

I do, however, like that more than 83% of the Trust's borrowings are in the local currencies. 

This provides a natural hedge against foreign exchange risk.

Osaka Namba Washington Hotel Plaza

What about the DPU?

Well, although the DPU became more realistic with the expiry of the sponsor's waiver to income distribution, seasonality makes it inaccurate to annualise any one quarter's DPU. 

So, instead, I simply added 4 consecutive quarters' income distributions which gives me a 12 months DPU of 5.5c. 

This is probably more realistic than the forecast of 7.07c during the IPO. 

At a price of 72c a unit, therefore, a realistic distribution yield is 7.64%.

Although the Trust has hotels in a few countries, most of its properties are in Australia. 

So, how well the Australian economy and hospitality sector do will have a big impact on the performance of the Trust. 

A stronger A$ will be good for the Trust. 

Will this happen? 

Well, if the much talked about recovery of the global economy takes place, then, yes.

For someone who is in search of more stability in passive income generation, hospitality business trusts, Ascendas Hospitality Trust included, might not be the best places to look. 

However, if we feel that the Trust's current DPU is realistic (which is another way of saying "not inflated"), then, as an investment to diversify our sources of passive income, it might be worth a nibble.

Having declined to a price of 72c a unit, investors who got in at IPO would still be nursing a paper loss even after taking in the income distributions received so far. 

They might want to ask if they were not already invested, would they initiate a long position at today's price?

See portfolio of hotels: here.

Pullman Sydney Hyde Park - Australia




Related post:
1. Ascendas Hospitality Trust: Am I interested?
2. OUE Hospitality Trust: Considerations.

A chance to win a $15,000 start-up fund!

Here is a chance to win a $15,000 start-up fund.

Yup, that is what the GRAND PRIZE WINNER at the end of the contest period wins!

10 others will also be given the opportunity to have interview sessions with successful ladies from top international companies.

So, sick of working for someone else?

Find out how your could be a winner at:
http://sg.shareddis.com/p/Anma
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Soilbuild REIT: A nibble.

I blogged about Soilbuild REIT slightly more than a year ago. It did badly during its IPO and I said that, already having a huge exposure to industrial properties S-REITs then, I was not interested even as its unit price declined to 70c.

At the time, I also told a reader that if the REIT's unit price should decline so much as to offer a 10% distribution yield, I would initiate a long position even with my already large exposure to industrial properties S-REITs. That didn't happen.

Since then, the REIT's unit price has recovered thanks, to a large degree, to Chinese billionaire Tong Jin Quan who bought into the REIT. The more sanguine attitude Mr. Market has towards REITs in recent months probably has a large part to play in the price recovery too.

Of course, since then, my exposure to industrial properties S-REITs has also reduced by quite a bit, largely from the reduction of exposure to Sabana REIT. With my portfolio's much lighter weighting in industrial properties, I revisited Soilbuild REIT.

At almost 80c a unit, the estimated distribution yield is 7.5%, annualising a quarterly DPU of 1.5c. Although this is not enough for me to unlock my war chest, I decided to initiate a smallish long position which gives me an incentive to continue monitoring this REIT and to possibly make a bigger investment in future.

The following is taken from the REIT's presentation slides dated 29 July 2014:

Gearing: 30.3% (Will increase to 32% after acquiring 20 Kian Teck Lane.).

Average all in interest cost: 3.08% (95% hedged).

Interest cover ratio: 5.4x.

NAV/unit: 80c.

Portfolio remaining land lease: 49 years.

Occupancy: 98.5%

Two things that investors in Soilbuild REIT should keep an eye on are:

1. 32% ($95m) of debt is maturing in 2015.

2. 29.2% (accounting for 22.4% of rental income) of leases are expiring in 2015.

I do not think that the REIT will have trouble refinancing its debt. However, the concern would be the cost of debt. It is unlikely that the cost of debt would be lower. If cost of debt were to increase by just 1% for debt maturing in 2015, distributable income would see a reduction of some 4%, everything else remaining equal.

For leases expiring in 2015, it would be realistic to expect that not all would be renewed. Not all the expiring leases in 2014 were renewed. If the REIT should be unable to find new tenants, expect occupancy to decline. The supply of industrial spaces in Singapore is not as tight as it once was.

Going back to the concern of a possibly higher cost of debt, if risk free rates were to increase by 1%, Mr. Market could demand a yield of 8.5% (from the current 7.5%) from Soilbuild REIT. In such an instance, unit price would have to fall to 70.5c to meet such an expectation, all else remaining equal. We have to be aware that this is a possible downside and a very real possibility too.

Like with any other investment, if Mr. Market should offer much lower prices like when he threw a big tantrum in the middle of last year, what some called the "Taper Tantrum", we could buy more with bigger margins of safety. I could develop a bigger appetite quite suddenly then. For now, it is just a nibble.

See presentation slides: here.
See announcement: here.

Related posts:
1. Soilbuild Business Space REIT (Soilbuild REIT).
2. Bonds, REITs and the instant gratification of yield.